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The Economics Society at UCI in partnership with the UC Irvine Law School (and the Pre-Law Society) will be hosting a law school admissions and student panel.

This will be a chance for undergraduates to have direct contact with the Dean Jane Austin, Dean of UCI Law School Admissions, and be able to get information (and tips) from her about what makes a candidate stand out in the very competitive law school application process. It will also be a chance for undergraduates to interact with and get the inside scoop about law school, student life, and possible career opportunities from a select group of UCI law school students.

When: Monday, February 23rd, 2015 – 6:30-8:00PM

Where: SSPA 1165

Space is limited. RSVP beforehand is necessary.

If you would like to attend this event, please contact either the Economic Society’s Content Creator, Martin Bukowiec (mbukowie@uci.edu) or the Economics Society’s President, Andrea Licata (licataa@uci.edu).

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“Each year since 1978, the Federal Reserve Bank of Kansas City has sponsored a symposium on an important economic issue facing the U.S. and world economies. Symposium participants include prominent central bankers, finance ministers, academics, and financial market participants from around the world. The participants convene to discuss the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion.”

- Federal Reserve Bank of Kansas City

This year’s theme was “Re-Evaluating Labor Market Dynamics”.

Specifically, the Symposium detailed “how central bankers and macroeconomists think about the persistent effects of the Great Recession in the labor market that justify continued zero interest rate policies that have lasted nearly six years and possibly may finally come to an end next year.”[1]

Among the key participants/speakers at this year’s conference were:

some of world’s top central bankers:

Janet Yellen, Chair of the Board of Governors of the Federal Reserve

Mario Draghi, President of the European Central Bank

Haruhiko Kuroda, Governor of the Bank of Japan

Ben Broadbent, Deputy Governor for Monetary Policy of the Bank of England

Alexandre Tombini, Governor of the Central Bank of Brazil

and economists:

Steve Davis (University of Chicago) and John Haltiwange (University of Maryland) who “presented a paper demonstrating how reduced U.S. labor market fluidity has become in the past twenty-five years, pointing to reduced job reallocation rates in the most recent recessions, particularly in the Great Recession.” [1]

Till Marco von Wachter (UCLA) who “presented a paper that refutes the idea that the Great Recession generated a persistent decline in the employment rate compared to past recessions by using measures of long-term nonemployment rather than measures of long-term unemployment.” [1]

David Autor (MIT) who “presented a paper on labor market polarization between high-education/high-wage jobs and low-education/low-wage jobs as well as the machine displacement of human labor, arguing that commentators often overstate the extent of machine substitution for human labor, ignoring strong complementarity between technology and human labor).” [1]

Karen Eggleston (Stanford), David Lam (University of Michigan), and Ronald Lee (UC Berkeley) who in a panel “addressed how population demographics underlie many of the changes in the macroeconomy such as the recent fall in the labor force participation rate driven in large part by baby-boomer retirement.” [1]

For us, students of economics, the Jackson Hole Symposium is something that we should closely follow as the event provides valuable insight into the key and current economic issues that are being faced and debated both in academia and outside. The Jackson Hole Symposium is one of the two large world-renown economic conferences that are held annually (the other being the World Economic Forum Meeting held in Davos). It is to economists something equivalent, if not larger, to what the Coachella Festival is to music enthusiasts. The bottom line is the Jackson Hole Symposium, in the economics world, is “BIG”. And rightly so; after all, economics history has been made at this conference in the past.

Given its largely academic character and sleepy conclave in the Teton Mountains, the Symposium often gives the impression of being quite removed from Wall Street and the everyday financial markets. This impression could not be farther from the truth; it is “closely followed by market participants, as unexpected remarks emanating from the heavyweights at the Symposium have the potential to affect global stock and currency markets” (Investopedia). With the exception of this year, there is in fact a noticeable crowd of Wall Street attendees/participants.

The (Evolving) Role of Central Banking.

“Central bankers, a group of largely independent technocrats, wield more power over the fates of politicians, investors and regular folk than ever before. In the absence of government action, they are bearing most of the burden of supporting economic recoveries in the U.S. and Europe. With their bond purchases and other unconventional policies, they have become a major force holding up financial markets around the world.”

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A recent hot economics topic to have surfaced (at least here in the U.S.) is that of “economic patriotism”. Here’s what you need to know.

What is Economic Patriotism?

Economic patriotism can generally be defined as “the coordinated and promoted behavior of consumers or companies (both private and public) that consists of favoring the goods or services produced in their country or in their group of countries.” (Wikipedia. Economic Nationalism.)

But recently, the term has become synonymous with the call to stop corporate inversions. Which begs the questions of: What is a corporate inversion? And how does it relate to “economic patriotism”?

“In an inversion, a U.S. company sets up or buys another company in a country with a lower corporate tax rate and then calls the new country home—thereby dodging U.S. taxes it would otherwise have had to pay.

How does it work?

When a company undertakes an inversion, it’s basically just moving its legal address outside the country for tax purposes. That lets companies move some of their profits to their new homeland and pay less in taxes to the U.S. Treasury. Nothing else moves; it’s business as usual for their American operations, employees and customers.”

So how do these inversions relate to economic patriotism? Well, for one, a way for a country to practice economic patriotism is to engage in financial protectionism or the enactment of policies and engagement in activities hostile to financial activities (including, but limited to M&A arena) that are deemed to threaten the national economic interests.

Usually this is accomplished by governments preventing foreign companies from acquiring those domestic ones considered to be of strategic economic value (e.g., the Pepsico-Danone, Mittal-Arcelor, and GDF-Suez affairs in France). But in the case of corporate inversions, we’re seeing something similar to the flip side; the concern is that by changing their status from “domestic” to “foreign” by merging with and/or acquiring foreign companies, larger multinationals are deemed to be threatening to the domestic economic interests of a country. The logic, as articulated by many American political leaders, is that by allowing corporate inversions the U.S. is losing vital economic revenue (achieved through corporate taxation) and thus U.S. economic interests are being “jeopardized”.

Secondly, is the consideration of what it really means for a corporation to be an “American corporation”? The United States, after all, provides an environment where corporations have access not only to one of biggest and most advanced marketplaces for goods and services, but also well-developed infrastructure and legal systems. Much of this is provided at very little to no cost to the corporations, themselves, proponents of economic patriotism in the U.S. argue. Therefore, shouldn’t an American corporation have responsibilities to the country as well?

If we accept that an American company does have responsibilities to the country as well, then it’s easy to see the relationship between inversions and economic patriotism; for when a company engages in a corporate inversion, it avoids one of its civic responsibilities to the U.S. (spec. fully paying its corporate tax share) while continuing to enjoy the same benefits as before.

Why Now?

This issue of tax inversion has gained media presence in large part due to the POTUS’s vocalilty on the subject. In an appearance at a technical college in Los Angeles (Thursday July 24th, 2014) President Obama called for “economic patriotism” from companies and urged Congress to eliminate tax benefits that have encouraged a wave of corporate inversions (see related Bloomberg and New York Times articles and the video links below).

As you’ve probably noticed, the recent discussion surrounding economic patriotism is, in reality, a microcosm of the larger ones taking place in economic, business, and political circles regarding as to how the U.S. Tax Code (spec. with regards to corporations) should be reformed and what exactly are/should be the responsibilities of multinational corporations in this global economy.

Therefore it is imperative for each of us to educate ourselves on these issues and look skeptically at the various points of views in the discussion.

If you should be interested in reading about some of these different perspectives, I’d recommend the following as a good starting place:

“Dozens of Companies Admit Using Tax Havens” by Citizens for Tax Justice Citizens, a 501(c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation.

(Disclaimer: The views expressed by authors in the above list of linked articles are in no way, shape, or form representative of this blogger’s or the Economics Society at UCI’s views on the “economic patriotism”, corporate inversions, U.S. tax reform, or any other economic or political subjects discussed in those articles. They are merely provided for further educational purposes and should as any reading material be subject to objective scrutiny)

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What would I consider to be some important principles of economics that I want my students to walk away with?

1. Market processes promote long-term growth. The market processes of specialization, exploiting comparative advantage, and creative destruction have benefits that are widely dispersed in the long run. These processes impose short-term costs on those who have invested in physical and human capital made obsolete.

2. Competition is a regulatory mechanism. For example, the ability of a business to exploit consumers or workers is attenuated by competitive forces. Businesses do not like competition. They lobby for policies that stifle competition. Often, such lobbying is successful. Competition is far from perfect as a regulatory mechanism. It is possible to be too optimistic about how well it can work. It is also possible to be too optimistic about the prospects for fixing the flaws in markets using government regulation.

3. Human cooperation is difficult to achieve. The conditions under which large organizations can operate without internal friction are never satisfied. Aligning incentives is more difficult in the real world than it might appear to be in the abstract.

4. Economists need two hands. The conditions under which markets will produce optimal outcomes are never satisfied. The conditions under which a government official can act as an omniscient, benevolent central planner are never satisfied.

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The last econ discussion was about the role of health in economic development. Overall, the presentation was pretty informative and interesting, and the invited speaker, who is a UCI econ grad student, is very friendly and open to questions. There is one issue I want to clarify though. At the end of the discussion, we talked about the economics of healthcare in general. I raised my hand and asked a question: “how is the healthcare market different from other markets?”. The speaker responded that the healthcare market is different because externalities (a form of market failure) are prevalent so government needs to intervene to correct this failure. When I asked for an example, the speaker brought up obesity. Her reasoning is as follows: since obese people are more likely to have life-threatening diseases (such as heart diseases, diabetes, cancer, etc.), their healthcare expenses are probably much higher than those of normal people over their life time. This in turn has a “spillover” effect on insurance premium: insurance companies must increase their fees on everyone else to cover the high cost of those obese people. The “externality” here is the monetary damage on the non-obese insurance buyers, who do not do anything to deserve the hike in their insurance premium. I then asked the speaker: “if that’s an ‘externality’, then we can see it in all other markets, not just healthcare. For example, when a large number of people suddenly love to eat rice, their purchase of rice will push the price of rice up, making the rest of us worse off since we will have to incur more cost than before to obtain the same amount of rice”. The speaker then said: “it’s not an externality, it’s just supply and demand”. To which I replied: “then the obesity example is also supply and demand. Obese people simply increase the demand for healthcare, thus increasing the insurance premium. I think the real problem with the healthcare market is information asymmetry, not externality”. The speaker then said: “information asymmetry is just a kind of externality”. The conversation ended there as we had limited time and other questions to cover.

Now, how do we make sense of the conversation above? Is “obesity” with its “spillover” effect on insurance premium an “externality”? Or is it something else? Technically, it is not wrong to argue that the effect is an “externality”. But how about my example of the rice market? Is it a kind of externality too? Well, it is. But these “externalities” do not have the implication that our speaker assumed (resource misallocation). Yes they are “externalities”, but are they “market failures”? The answer is probably not. There are two kinds of externality: pecuniary externality and technical (or real) externality. Both of our cases fall into the former category, which is pecuniary externality. A pecuniary externality is one that operates through prices, not real resources. A pecuniary externality is generally not considered a market failure as it has offsetting effects. In my rice example, the increase in price would disadvantage the rice buyers, but would advantage the rice sellers. The “negative externality” on the buyers are offset by the “positive externality” on the sellers. Similarly in the obesity case, the “negative externality” on the insurance buyers is offset by the “positive externality” on the insurance providers (through higher insurance premium). This is very different from a “real” externality case, where usually no such offsetting effect is present. The “real” externality (or technical externality) is the standard market failure we learn in econ classes: non-compensated, direct resource effects imposed on a third party. A barbecue at your house may emit harmful smoke to a neighbor next door. Your smoking cigarette may make me sick. These are externalities that cannot be offset (or easily offset) by the same price mechanism as in the aforementioned pecuniary externality cases.

So there is nothing wrong with the healthcare market? Not necessarily. According to standard economics, healthcare insurance suffers from a kind of market failure called “information asymmetry”. The basic idea is that when one party in an exchange has more information than the other, the market will be “mispriced”, resulting in loss of beneficial trades. In a typical health insurance model, the insured knows more about his/her own health than the insurer. Therefore, those with higher risks tend to buy more insurance while those with lower risks tend to buy less. The insurer, presumably not being able to differentiate the high risk people with the low risk ones, charges the same premium to all customers, based on the average risk of the whole group. The result is that those with higher than average risks will buy insurance and those with less than average risks will opt out. Consequently, the insurer cannot cover the healthcare costs because the premium only reflects the average risk while all of its customers have higher than average risks. This forces the insurer to increase the premium, which in turn drives more customers out of the market. The problem here is not merely that low-risk customers are made worse off, as the “externality” narrative suggests. The true problem here is that both parties (the insurer and the insured) are made worse off as fewer than potential trades are made. If the insurer knew the true risk of each customer (no information asymmetry), it would charge different premiums to different people. As a result, those with higher risks would not necessarily drive out those with lower risks as the two groups would pay different levels of premium. The information asymmetry model in health insurance is based on a debatable assumption: that insurers cannot differentiate risky customers from safe ones. Whether this assumption is true or not is up to empirical evidence to decide.